February 5, 2018 - Thermal coal traders are displaying an increasing interest in shipments to Egypt amid a backdrop of declining spot demand in the Atlantic Basin, sources say.

Sellers expect the market for imports of both thermal coal and petcoke to grow due to local consumers' flexibility on which fuel can be burnt, the sources say.

According to sources, South African 6,000 kcal/kg NAR thermal coal is the preferred grade for most buyers, but has to compete with cheaper Russian coal of similar specifications, while end-users able to consume petcoke previously preferred that fuel as a higher calorific value meant it was usually a more economical option.

In recent months, US and Russian coal were the fuel of choice for many buyers, a familiar situation across the Atlantic Basin as the strength of prices in key European markets demanded a more thrifty blending strategy.

A local trader was offered US-origin coal around $60/mt FOB US East Coast, and estimated the dry bulk freight rate to be $20-$22/mt for a voyage from the US East Coast to Alexandria, Egypt, giving a theoretical delivered price of around $82/mt.

According to the source, this was a competitive level and would allow more US coal to compete with Russian material.

Current Limitations

Data from Platts cFlow trade flow software show a total of 13 vessels laden with coal discharged at Egyptian ports so far this year, with Russia and the US the dominant origins.

The largest coal consumers in Egypt are cement plants.

Sell-side sources estimate the market for US-origin coal in Egypt to be around 1.5 million mt/year, mainly Central Appalachian (CAPP) coal with higher heating and sulfur values.

This would equate to roughly 1.3 million mt/year of Russian coal, adjusted to a 6,000 kcal/kg NAR basis.

A major Egyptian cement plant switched in recent months to thermal coal as its primary fuel rather than petcoke and several others followed suit, boosting demand, a Mediterranean-based trader said.

There are some limitations currently for international sellers, as most Egyptian ports are currently unable to berth any fully-laden ship larger than a Supramax, which limits the origins of coal available to consumers, as Panamax or Capesize ships are the preferred vessel size for most sellers.

A lack of any dedicated futures market was also a cause for concern with both buy and sell-side players as it prevents players from effectively hedging their positions.

A US-based sell-side source said it would most likely trade with Egyptian buyers based on a delivered-Europe index, allowing it to trade the corresponding futures market.

According to buyers and traders in the country, a major barrier to increasing the shipments of seaborne coal to Egypt previously was a difficult financial situation, which hampered buyers' ability to purchase foreign currency and gain credit for any deals.

But the currency was floated in November 2016, and the removal of foreign currency transfer limitations in June 2017 allowed buyers to source more coal, when previously they had been largely restricted to using Egyptian pounds.

Long-Term Market

The current flexibility many consumers have regarding which fuel they use means pricing and sulfur restrictions are the key factors for procurement.

According to a local trader who sells fuel to cement plants, Saudi-origin petcoke usually has sulfur values that are too high, meaning US-origin petcoke is the fuel most likely to compete with thermal coal.

The source also said this flexibility on the part of consumers was limiting the likelihood of any long-term contracts being inked as buyers tend to look for whichever material is pricing into Egypt most competitively.

Currently, there are plans to build four coal-fired power stations in Egypt, which traders see as a positive long-term factors in the country's coal consumption.

That said, construction of most of the plants was delayed in early 2017 until the 2022-2027 five-year plan owing to current overcapacity in Egypt.

Should the projects come online, it would add an additional 14.64 GW of coal-fired capacity in Egypt.